ALJDEC

00F-1864-ROC · Registrar of Contractors · 2000-06-07

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: June 5, 2000 APPEARANCES: Kenneth G. Royer, Esq. (of Snell & Wilmer, L.L.P.) represented Complainant Tempe Mechanical, L.L.C. Michael L. Rhees, Esq. (of Rhees, Hopkins & Kreamer) represented Respondent Granville Constructors 1994, Inc. ADMINISTRATIVE LAW JUDGE: Daniel G. Martin _____________________________________________________________________ The question presented by this matter is whether Granville Constructors 1994 Inc. is subject to discipline for acts or omissions in violation of A.R.S. § 32-1154. Based on the entire record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law and Recommended Order: FINDINGS OF FACT Respondent Granville Constructors 1994 Inc. (“Granville”) is the holder of a Class B-01 license (No. 104143) issued by the Registrar of Contractors (“ROC”). On October 22, 1998, Complainant Tempe Mechanical, L.L.C. entered into a written subcontract with Granville (the “Subcontract”) to provide mechanical contracting services at Desert Winds Elementary School in Phoenix, Arizona (the “Project”). The architect for the Project was Hofmann-Dietz Architects, Ltd. (“Hofmann-Dietz”). The original Subcontract price was $507,895.00, $510,691.96 after adjustment for change orders. The instant dispute arises out of a complaint that Tempe Mechanical filed against Granville on January 24, 2000 alleging non-payment of $59,451.98. On March 10, 2000, in response to that complaint, the ROC issued a Citation and Complaint charging Granville with violations of A.R.S. § 32-1154(A)(7) (wrongful or fraudulent act resulting in substantial injury) and (A)(11) (failure to pay monies in excess of $750.00 when due for materials or services rendered). The parties do not dispute that of the $510,691.96 Subcontract price, $59,451.98 remains unpaid. The issue is whether any part of that balance is due and owing. Tempe Mechanical takes the position that the entire amount is due and owing. Granville takes the position that after adjustment for backcharges and liquidated damages assessed by the owner against Granville (and passed through by Granville to Tempe Mechanical), and further adjustment for (a) backcharges assessed directly by Granville against Tempe Mechanical and (b) claims by certain of Tempe Mechanical’s subcontractors, no amount is due. Because there is no dispute as to the dollar amount that remains unpaid, it is the validity of Granville’s assessments for backcharges, liquidated damages and subcontractor claims with which this matter is ultimately concerned. The Project followed a pattern typical of many construction projects. Subcontractors submitted pay applications to Granville, the general contractor, who in turn submitted pay applications to the owner, Deer Valley Unified School District No. 97 (the “District”). Hofmann-Dietz, both as architect and as the District’s representative, reviewed Granville’s pay applications. If the work for which Granville sought payment met the requirements of the contract between Granville and the District, Hofmann-Dietz would certify the amount eligible for payment. Upon receipt of payment from the District, Granville paid its subcontractors. On or about July 12, 1999, Hofmann-Dietz certified $474,935.53 as due and payable pursuant to Granville pay application number 13. [See Exhibit 5] The continuation sheets attached to pay application number 13, i.e., the documents that represent the architect’s certification of work performed, indicate that as of June 30, 1999, Tempe Mechanical’s work was 100% complete with two exceptions: (a) one portion of the HVAC trim/control work was only 90% complete, with $3,367.90 remaining to be paid upon completion; and (b) a second portion of the HVAC trim/control work was only 50% complete, with $16,639.50 remaining to be paid upon completion. The evidence of record established that on July 26, 1999, the District paid Granville the $474,935.53 certified by Hofmann-Dietz as due and payable pursuant to Granville pay application number 13. On or about August 9, 1999, Hofmann-Dietz certified $468,052.16 as due and payable pursuant to Granville pay application number 14. [See Exhibit 7] The continuation sheets attached to pay application number 14 indicate that as of July 31, 1999, Tempe Mechanical’s work was 100% complete with only one exception, that is, 5% of the HVAC trim/control work, representing a $1,683.95 balance, remained to be completed. The only other balance remaining with respect to Tempe Mechanical’s work as of the date that Hofmann-Dietz certified Granville pay application number 14 was $3,199.51 in retention. The evidence of record established that on August 25, 1999, the District paid Granville the $468,052.16 certified by Hofmann-Dietz as due and payable pursuant to Granville pay application number 14. Despite having received this payment, Granville did not make a corresponding payment to Tempe Mechanical. Up until submission of its final pay application, number 15, Granville apparently did not experience any undue difficulties in obtaining architect certification of, or owner payment on, its pay applications. However, after submission of Granville’s final pay application, Hofmann- Dietz raised a host of “areas of concern” and refused to certify that pay application.[1] Mason Hite, a Hofmann-Dietz senior associate, detailed these “areas of concern” in a November 2, 1999 letter to David Murray, Granville’s construction manager [Exhibit 11]. Pertinent to the present dispute are the following: a. The District assessed Granville $9,550.00 for the following “Owner Expenses,” which Granville in turn assessed against Tempe Mechanical: (1) Repair heat exchanger ($3,000.00), (2) Water treatment ($4,000.00), (3) Start-up assistance ($1,900.00) and (4) A/C service ($650.00). [See Exhibit 11] b. The District claimed $222,000.00 in liquidated damages for Granville’s alleged failure to have met Phase I and Phase II substantial completion dates, and $73,500.00 in liquidated damages for Granville’s alleged failure to have achieved timely final completion, a total of $295,500.00. [See Exhibit 11 and Exhibit B] Of this amount, Granville claimed that Tempe Mechanical was responsible for $20,000.00. [See Exhibit 14][2] In addition to the foregoing, by correspondence dated January 31, 2000 [Exhibit 16] Granville notified Tempe Mechanical that as of January 19, 2000, Granville had assessed a backcharge against Tempe Mechanical in the amount of $7,639.17 for replacement of two areas of carpeting at the Project (rooms B124 and A116). Granville alleged that water leaks from fan coils had damaged these carpets. Finally, beginning in November 1999, Granville began referencing in correspondence to its surety and to Tempe Mechanical’s counsel certain undefined “claims” from two of Tempe Mechanical’s subcontractors, Control Engineering and Technical Air Balance, for $14,587.05 and $8,200.00, respectively. [See, e.g., Exhibits 13 and 14] By summing the foregoing claims and assessments, Granville concludes that Tempe Mechanical owes it $59,976.22, an amount $524.24 greater than the $59,451.98 claimed by Tempe Mechanical. Thus, Granville argues, there is no amount due and owing from it to Tempe Mechanical.[3] The Administrative Law Judge finds that Granville failed to present any substantial evidence in support of any of its assessments against Tempe Mechanical. Regarding the “owner assessments” that Granville assessed against Tempe Mechanical, Granville failed to present any evidence either that these are valid costs, or that, even if they are, Tempe Mechanical is responsible for their reimbursement. Granville did not conduct any investigation into these claims, and assessed them against Tempe Mechanical only because they fell within Tempe Mechanical’s scope of work. The Administrative Law Judge finds, on this basis, that Granville did not have reasonable grounds upon which to shift these expenses to Tempe Mechanical, and that the “owner expenses” are therefore not a proper offset against the $59,451.98 unpaid balance. Regarding the $7,639.17 Granville backcharge for replacement of the two areas of carpeting at the Project, the Administrative Law Judge finds that Granville failed to present any substantial evidence that the damage to the carpeting is attributable to Tempe Mechanical. Granville’s evidence in this regard consisted solely of a hearsay statement in the architect’s November 16, 1999 punch list, without any further explanation, that a fan coil leak had damaged one of the carpets (room B124). [See Exhibit C] Granville’s only witness at the hearing, Mr. David Murray (Granville’s construction manager), testified that he did not discuss the carpet issue with either of Granville’s superintendents at the Project, nor did either of them ever inform him that Tempe Mechanical was responsible for the damage. The Administrative Law Judge finds, based on the foregoing, that Granville did not have reasonable grounds upon which to backcharge the carpet replacement charge against Tempe Mechanical, and that the $7,639.17 replacement cost that Granville incurred is not a proper offset against the $59,451.98 unpaid balance. Regarding the alleged “claims” by Tempe Mechanical’s subcontractors (Control Engineering and Technical Air Balance) for which Granville assessed a total of $22,787.05 against Tempe Mechanical, the Administrative Law Judge finds that Granville failed to present any substantial evidence as to the nature or validity of these claims. As late as February 9, 2000, in its response to the Citation and Complaint issued against it by the ROC [Exhibit 18], Granville admitted “we have no particulars of these claims at this time.” And, the best testimony that Granville could elicit from its witness at the hearing, Mr. Murray, is that Mr. Murray “believes” these claims are for non-payment by Tempe Mechanical. However, Mr. Murray could not elaborate any further, as he had no direct knowledge of the nature of the claims. The Administrative Law Judge finds, based on the foregoing, that Granville did not have reasonable grounds upon which to assess the subcontractor claims against Tempe Mechanical, and that these claims are not a proper offset against the $59,451.98 unpaid balance. Regarding Granville’s assessment against Tempe Mechanical for $20,000.00 in liquidated damages, the Administrative Law Judge finds that Granville failed to present any substantial evidence in support of this assessment. Section 3.1.1 of the Subcontract grants the following rights to Granville with respect to assessments for liquidated damages: “Liquidated damages for delay . . . shall be assessed against the Subcontractor only to the extent caused by the Subcontractor or any person or entity for whose acts the Subcontractor may be liable, and in no case for delays arising outside of the scope of this Subcontract.” Granville presented no evidence that Tempe Mechanical caused the Project to suffer any delays. To the contrary, the evidence presented at the hearing demonstrated that Tempe Mechanical worked diligently to maintain its schedule, and that to the extent any delays existed, those delays are attributable to subcontractors other than Tempe Mechanical. The Administrative Law Judge finds, based on the foregoing, that Granville did not have reasonable grounds upon which to assess liquidated damages against Tempe Mechanical, and that these claims are not a proper offset against the $59,451.98 unpaid balance. After carefully considering the documentary and testimonial evidence in this case, the Administrative Law Judge finds that Granville, without legal justification, withheld monies properly due and payable to Tempe Mechanical.[4] At the hearing, Tempe Mechanical requested an award of $5,509.22 in interest under A.R.S. § 41-2557(F). The Administrative Law Judge declines to find that Tempe Mechanical is entitled to such an award of interest on the basis that it represents a claim for damages not properly awardable by this tribunal. CONCLUSIONS OF LAW In this proceeding, Tempe Mechanical bears the burden to prove, by a preponderance of the evidence, that Granville is subject to discipline for violations of A.R.S. § 32-1154(A)(7) and/or (A)(11) as charged by the ROC in its March 10, 2000 Citation and Complaint. A preponderance of the evidence is “such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960). Preliminarily, the Administrative Law Judge concludes that Tempe Mechanical established by substantial evidence that $59,451.98 of the Subcontract price remains unpaid, and that this full amount, less retention in the amount of $3,199.51 for work that has not yet been certified for payment, is due and owing to Tempe Mechanical. Therefore, the burden shifts to Granville to establish the merits of its affirmative defense, i.e., even though that amount is unpaid it is not due and owing because of the various charges that Granville assessed against Tempe Mechanical. See A.A.C. R1-19-119(B)(2) (burden of establishing affirmative defense falls on party asserting the defense). Based on Findings of Fact Nos. 14-19, above, the Administrative Law Judge concludes that Granville failed to meet this burden. Therefore, the Administrative Law Judge concludes that Granville currently owes Tempe Mechanical $56,252.47 ($59,451.98 minus the $3,199.51 retention), that this amount is presently due, and that Granville has failed to pay this amount without valid legal excuse. A.R.S. § 32-1154(A)(11) provides in part that a contractor is subject to discipline for “failure . . . to pay monies in excess of seven hundred fifty dollars when due for materials or services rendered . . . .” The Administrative Law Judge concludes, on the evidence presented, that Granville violated this section by its failure to pay Tempe Mechanical the $56,252.47 balance due, and that Granville is therefore subject to discipline. A.R.S. § 32-1154(A)(7) provides in part that a contractor is subject to discipline for “the doing of a wrongful or fraudulent act . . . as a contractor resulting in another person being substantially injured.” On the evidence presented, the Administrative Law Judge is unable to conclude that Granville engaged in any fraudulent acts. However, there is ample evidence upon which to conclude that Granville wrongfully withheld funds from Tempe Mechanical, and that in so doing Granville caused substantial injury to Tempe Mechanical. Further, the Administrative Law Judge concludes that Granville engaged in wrongful acts resulting in substantial injury when it assessed backcharges and other claims against Tempe Mechanical without any legitimate basis for doing so. Thus, Tempe Mechanical met its burden to prove that Granville violated A.R.S. § 32- 1154(A)(7), and Granville is subject to discipline as a result. The ROC’s March 10, 2000 Citation and Complaint advised Granville that in the event of a finding of a violation against it, Granville’s prior disciplinary record of final Registrar of Contractors’ orders could be considered in mitigation or aggravation. Accordingly, subsequent to the conclusion of the instant hearing, the Administrative Law Judge took notice of prior final disciplinary orders against Granville in the ROC’s official records. Those records revealed several prior complaints that had gone into the hearing process. Therefore, Granville’s prior record is deemed to be marginal. The Administrative Law Judge considered this record in connection with formulating the recommended disciplinary penalties to be imposed as a direct result of this case. The Registrar of Contractors’ authority in disciplinary matters such as the one presented herein includes the ability to impose reasonable conditions that allow the disciplined contractor to reduce the scope of the disciplinary action taken against it. The Administrative Law Judge deems the exercise of such authority to be appropriate in the instant case. Therefore, based upon all the evidence, a reasonable condition in this case would consist of the payment by Granville to Tempe Mechanical of $56,252.47, the current balance due under the Subcontract. Imposing such a condition is preferable to imposing a disciplinary action against Granville’s license without providing a condition to reduce or eliminate same. RECOMMENDED ORDER It is recommended that Granville’s Class B-01 license be SUSPENDED commencing on the effective date of the Order entered in this matter. It is further recommended that if Granville pays or tenders the amount of $56,252.47 to Tempe Mechanical on or before the effective date of the Order entered in this matter, and provides written proof of such payment to the ROC, then the above provided license suspension shall not take place. It is further recommended that upon the effective date of the Order entered in this matter, or the expiration of the foregoing suspension, whichever occurs later, Granville’s Class B-01 license be placed on disciplinary probation for a period of ninety (90) days. It is further recommended, in addition to the above provided penalties, that any continuation or restoration of Granville’s contracting rights, whether or not probationary, shall be subject to a condition that Granville first post an additional surety bond, cash deposit or alternative deposit for a period of twenty-four (24) months, including future renewal periods, in the amount of $2,500.00, such bond or deposit to be in addition to the required surety bond or cash deposit set forth in A.R.S. § 32-1152(D). Cash or alternative additional deposits, if utilized, shall be returned only after the expiration of an additional two year period following the above-provided twenty-four (24) month period and only if no claims are then pending.

Done this day, June 22, 2000.

______________________________________ Daniel G. Martin Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Michael P. Goldwater Registrar of Contractors Attn: Joyce Armijo 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________ ----------------------- [1] Although Granville pay application number 15 is not yet certified, the continuation sheets indicate that Tempe Mechanical completed the remainder of its work under the Subcontract (i.e., the 5% of the trim/control work that represented the $1,683.95 balance in Granville payment application number 14). [See Exhibit 9]

[2] In subsequent correspondence, Granville increased this claim to $25,000.00. [See Exhibit 20] However, Granville never explained to Tempe Mechanical the basis for this increase or, for that matter, how it had calculated Tempe Mechanical’s alleged share of the assessment in the first instance.

[3] If one includes the unexplained $5,000.00 increase in Granville’s liquidated damages claim (see Finding of Fact No. 10, above), Granville’s total claim increases to $64,976.22. [4] Although the Administrative Law Judge does not specifically find that Granville engaged in a deliberate plan to deprive Tempe Mechanical of monies to which Tempe Mechanical was legally entitled, the evidence strongly suggests that Granville, facing financial pressure, failed to give fair consideration to Tempe Mechanical’s rights as its subcontractor, and attempted to stall for as long as possible any final reckoning of Tempe Mechanical’s account.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826